Let me tell you about one problem. After that, you will hopefully feel better about your money and judge less what others are doing with theirs.
There is a huge gap between the return on investments and the return that most investors get. This amplifies over time to either fuel or decimate your wealth.
The problem? Behavior.
Harvard studies show that more than 95 percent of our financial decisions are unconscious or emotional.
This explains the story of a “wildly successful” manager who founded and sold multiple companies and was forced to buy the best of everything and speculate his fortune in physical gold, cryptocurrencies, real estate and the “next best thing” (and not surprisingly it ended up going broke).
In contrast, American Ronald Read, who repaired cars and swept floors in a supermarket, left a fortune of $ 8 million when he died in 2014 at the age of 92.
Knowing how to be good with money doesn’t necessarily depend on what you know. It’s how you behave. And behavior is hard to teach, even really smart people.
American economist and Nobel Prize winner 2017 Richard Thaler said: “People are not stupid. The world is hard. “
In the real world, people don’t make financial decisions on a calculator. You do them in the mall, on a golf course, or in a meeting room where personal history, friendship, their own unique view of the world, ego, pride, marketing and strange incentives are mixed together.
People do stupid things with money. But that doesn’t drive them crazy – just human.
But here’s the thing: people of different generations, raised by different parents with different incomes and values, in different parts of the world, born into different economies, experience different job markets with different incentives and different levels of happiness, learn very different lessons.
The person who grew up in a war-ravaged region thinks about risk and rewards in ways that the son of a successful businessman cannot understand if he had tried
Everyone has their own unique experience of how the world works.
We all – you, me, all – go through life anchored in a series of views (largely formed in childhood and early adulthood) about how money works.
The person who grew up in a war-ravaged region thinks about risk and return in a way that the son of a successful businessman cannot grasp when he tries.
You know things about money that I don’t know and vice versa. You go through life with different beliefs, goals and prognoses.
Your personal experience is maybe 0.0000000001 percent of what happened in the world, but maybe 80 percent of how you think the world works.
Just as smart people can agree on how to invest your money, what to prioritize, how much risk to take, and so on.
We all think we know how the world works, but we’ve only seen a tiny part of it.
The real problem is that we have Paleolithic emotions, medieval institutions, and the latest technology on our hands.
Our three-pound brain hasn’t changed in 130,000 years, so it’s prepared to survive; fight, flee or freeze with mental shortcuts that ease the cognitive burden of making a decision.
Examples of this are “educated guesses” and “rules of thumb”.
People manifest these potential prejudices – be it through excessive stress and misreading of data, personal bias, or a rash philosophy that includes a fear of missing out and guarding.
This is not wrong. It’s just human.
The author Daniel Gilbert says in his book Stolpersteine about happiness: “The person is in work who wrongly believes they are finished.”
Money is a difficult subject. There is no right or wrong way to learn, speak, or feel money.
In my first column in today’s The National, I want to say that money is essentially an emotion and one of the most powerful forces in the lives of individuals and societies.
Inspired by the world’s leading writers, educators, neuropsychologists, and coaches, my future columns will not focus on the technical side of money (taxes, investments, cash flow, risk and estate planning), but on the personal side (relationships, emotions, hopes and Dreams), self-esteem and well-being).
I intend to ask you questions to raise your awareness of your own monetary history. What were the consequences of your upbringing and what is your “money mind”?
Are you a cautious saver or a carefree financier? Are you taking big risks or are you playing it safe? Have you meticulously mapped out your goals or will you see how it goes? Why do you have the goals that you do? Do you always want more or are you satisfied?
What are the consequences of all of this for your attitudes and behavior?
Ultimately, financial wellbeing means managing your money life with clarity, confidence, and control. It’s security now and in the future.
Money is largely a mindset. One that involves work, responsibility, and informed decisions. One that focuses on calibrating purpose with planning and meaning.
The good news? A positive attitude can be achieved without focusing on the number on your bank account.
Sam Instone is co-head of asset management company AES